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A bitter tasting

Serving up three cases of wine fraud

March/April 2017

ByDonn LeVie Jr.

Some wealthy wine aficionados are comfortable spending millions on supposedly rare vintages. But if they discover that they’re holding hundreds of bottles of worthless wine they might try to unload it to less sophisticated collectors, and bogus wines will continue to circulate. Here are some cases to illustrate the problem and ways to investigate the fraud.

The world of rare and expensive wine collecting is populated with high rollers who enjoy the one-upmanship that private sales or public auction purchases often bring.

They enjoy the limelight of owning one or several bottles of an extremely rare vintage that renowned wine experts have authenticated. However, when these “rare” or “expensive” bottles end up being counterfeits, the connoisseurs are often too embarrassed to admit fraudsters have duped them.
Wine counterfeiting has become so sophisticated that most collectors don’t report frauds or share the crimes with others.

Wine counterfeiting methods

A fine winery produces a limited number of cases of a particular excellent vintage and connoisseurs desperately want it. That vintage is ripe (so to speak) for counterfeit versions.

One of the most highly counterfeited wines is a 1945 Domaine de la Romanée-Conti. The winery only made two barrels of it, which is exactly 600 bottles. Counterfeit 1945 Romanée-Conti bottles have been found in every corner of the globe. One of the original 600 bottles would be worth more than $100,000. (See
How Atomic Particles Helped Solve a Wine Fraud Mystery, by The Kitchen Sisters, NPR, June 3, 2014.)

Recently, European police arrested seven people in connection with an international counterfeiting ring that sold 400 bottles of fake Romanée-Conti wine for more than 2 million euros ($2.7 million) as well as 220,000 bottles of phony Montalcino red wine. (See
Italian Police Uncover Massive Wine Fraud, Seize 200,000 Fake Bottles, by Elliot Hannon, Sept. 11, 2014.)

Counterfeiters use (often together) two basic methods to imitate an expensive or rare old wine:

Fraudsters are increasingly finding it more difficult to counterfeit contemporary fine wines because most producers have embedded anti-counterfeiting methods. For example, wine producers use specific types of fibers in label paper, strategically embed bottle pits (tiny micro-craters in the glass) or devise exact dimensions of the punts (indentations) in the bottle bottoms.

A device passes a fine needle through the cork. Argon gas is injected into the air space below the cork, which pushes the wine into small openings on the side of the needle and out through the top section of the device. There’s just enough wine to extract for one glass. It’s most practical use is for taste testing old wines. However, wine dealers would have to disclose using this sampling system prior to auction sales because it could detract from wines’ values.

Maureen Downey, founder of winefraud.com, said in an NPR Morning Edition interview that it’s impossible to detect a counterfeit wine by taste. [See
Sip On This: That $10,000 (Or $30) Bottle of Wine Might Be Fake, by Jackie Northam, NPR, Oct. 13, 2015.] No one has the palate to know how a 1787 Chateau Lafite-Rothschild should taste because wine character changes over time.

However, nothing leaves a worse taste in the mouth than opening a very expensive fine or rare wine only to learn that it’s bogus. You can’t tell by looking these days; in most cases, you need a sophisticated laboratory to determine whether a purported rare wine is authentic. And wine counterfeiting isn’t limited to rare collectable $20,000 bottles — fraudsters also find profit in hundreds of cases of $30 counterfeit wine.

“If somebody tells you $1 million of your collection is worth zero, your choices are take a hit or try and unload the stuff,” says Frank Martell, director of fine and rare wine for Heritage Auctions Martell, in the NPR interview. “And nobody wants to take a loss.”

While the ethics remain in doubt, it does explain why bogus wines continue to circulate among auction houses and private collectors. It’s a self-perpetuating operation.

Let’s look some famous wine-counterfeiting cases that used these methods — and one involving the classic Ponzi scheme.

The Thomas Jefferson bottles

As chronicled by Benjamin Wallace in his book, “The Billionaire’s Vinegar: The Mystery of the World’s Most Expensive Bottle of Wine” (Crown Publishers, May 2008), German pop-music promoter, wine collector and raconteur Hardy Rodenstock claimed in April 1985 that he knew of a mid-18th-century Parisian home that during demolition exposed a hidden cellar that contained close to 100 bottles of wine — two dozen of which where engraved with the initials “Th.J.”

Later that year, a Christie’s-in-London wine auction garnered $157,000 for a 1787 Lafite in an old bottle engraved with a scribbly notation: “1787, Lafite, Th.J.” Christie’s claimed evidence that suggested this bottle belonged to a collection of old French wines owned by none other than Thomas Jefferson, the author of the Declaration of Independence and the third U.S. president.

That set off a buzz in the rarified wine-collection world. People scrambled to obtain one or more of the remaining “Th.J.” bottles. Near the end of the 1980s, Bill Koch (of Koch Industries) paid $500,000 for four of the Jefferson bottles.

Fast-forward to 2005. The Boston Museum of Fine Arts (MFA) was preparing an exhibit of Koch’s somewhat eclectic collection of rarities. To protect the integrity of the upcoming MFA exhibition, it asked Koch to supply provenances for the Jefferson bottles. The chances of that happening were doubtful with such a short lead time prior to the exhibition.

So Koch hired former FBI agent, Jim Elroy, who sent an investigator to Jefferson’s Monticello estate to research the connection between the bottles and Jefferson. Jefferson was a meticulous record-keeper; he left almost no accounting gaps in nearly 60,000 documents — none of which revealed that Jefferson had ever ordered the newly “rediscovered” vintages from 1784 and 1787. Elroy now doubted that the Jefferson bottles were real and began considering ways to test the wine without opening the bottle.

Enter Cesium-137

In April 2005, Elroy approached a French laboratory researcher who was using low-level gamma ray detection for Cesium-137 (Ce-137) to date wine. Ce-137 is a product of fission and didn’t exist on this planet until the explosion of the first atomic bomb. (See
How Atomic Particles Helped Solve a Wine Fraud Mystery, by The Kitchen Sisters, NPR, June 3, 2014.)

That radioactive fallout, which is dispersed into the atmosphere, eventually makes its way into rain, soil and grapes. The French researcher protected the bottle with lead shielding and placed it close to a detector, which recorded the presence of gamma rays. He conducted the test one mile underground to additionally shield the bottle from normal atmospheric gamma radiation.

If the wine had been bottled before 1945, there shouldn’t have been any Ce-137 present. If there was, the wine would’ve been bottled after 1945. To add another layer of protection, the lead shielding had to have been smelted prior to 1945. The lead used for the Jefferson bottles tests was smelted nearly 2,000 years ago.

Repeated testing showed no Ce-137 present in the wine.

The tale of the dental drill

Elroy expanded his investigation with several global intelligence organizations and agents after the inconclusive Ce-137 test results. While running his fingers over one of the Jefferson bottles, it occurred to him to test the engraving. With the help of experts in 18th-century engraving methods and FBI tool-mark specialists, they tried to reproduce the engravings on the Jefferson bottles. Using a copper wheel-engraving device common in the 18th century, the letters displayed various line weights, much like the strokes of a fountain pen. The letters were also slanted in a way that couldn’t be reproduced by a copper-wheel engraving method. (See The New Yorker article,
The Jefferson Bottles, by Patrick Radden Keefe, Sept. 3, 2007.)

The result? The Jefferson bottles must have been engraved by a modern method using a hand-held power tool with a flexible shaft, such as a Dremel tool. Investigators eventually tracked down Rodenstock’s people in Germany who’d engraved the Jefferson bottles using a dental drill. (See the NPR interview, “How Atomic Particles … .”)

The experts used this tool to perfectly reproduce the bottle engravings.

The final undoing

A disgruntled landlord undid Rodenstock’s scheme. After a court ruled against Rodenstock for failure to pay rent (among other problems), the landlord entered the basement of the vacated house where he discovered a stack of unused blank wine labels and a large pile of unused corks. In another part of the basement were a few dozen empty wine bottles lying next to an old carpet covered with dirt. Rodenstock had been “aging” the wine bottles by rolling them in the dirt.

In 2007, the German magazine, Stern, offered to have the bottles tested again but Rodenstock declined the offer. Koch filed a lawsuit in 2007 and in May 2010, a U.S. court ruled against Rodenstock who, as a German citizen, refused to participate in the trial. (See “The Billionaire’s Vinegar” by Wallace.)

Rudy Kurniawan’s case: mixing old with new

Few people in the wine world had a nose and palate for wine like Rudy Kurniawan. In 2002, Kurniawan was making a name for himself with sommeliers in California and around the world as an intelligent, savvy wine collector and big spender. (See
Counterfeit Fine-Wine Dealer Sentenced to 10 Years, by Sean Gardiner and Sonja Sharp, The Wall Street Journal, Aug. 7, 2014.)

Beginning in 2004, he started using his very discriminating palate to concoct rare, expensive counterfeit wines in his kitchen and sell them to other millionaire and billionaire collectors around the globe — including Bill Koch, who spent $2.1 million on 219 bottles of phony vintage wine. (See
Sip On This … NPR.)

Kurniawan seemed to be a brilliant wine chemist and mixologist — he blended young California wines with older, low-quality vintage French wines (1970s Burgundy wine, good only for cooking), often coming very close to duplicating the legitimate expensive vintages. He would then add counterfeit labels that he printed from a laser printer and characterized the final product as the “rarest of the rare” to other investors.

Be careful which wines you fake

As so often happens with auctions of rare luxury or historic items, bidder enthusiasm and excitement over the rare wines far exceeded any healthy skepticism about their authenticity. But there were doubters in the investor crowd: Bill Koch and Burgundy wine expert, Laurent Ponsot, of Domaine Ponsot, both had an itch they couldn’t scratch. In 2008, the itch was scratched. Kurniawan overplayed his hand by trying to consign, via third party, several dozen bottles of Domaine Ponsot wine to an auction house. The problem? That particular vintage had never existed.

Similar modus operandi

In 2012, FBI agents raided Kurniawan’s Arcadia, California, home where they confiscated corks, dozens of empty bottles and 18,000 labels of the world’s rarest wines. Kurniawan’s approach to wine counterfeiting wasn’t unlike that of Hardy Rodenstock’s. He manipulated corks, labels and bottles to fool investors, and he made each bottle to order. Kurniawan’s fraudulent operation sold at least $50 million of bogus rare wine in eight years.

Kurniawan’s trial began Dec. 9, 2013, in a federal court in Manhattan, and a few days later he was found guilty of fraud in connection with selling counterfeit wines and defrauding a finance company. He was sentenced to 10 years in prison in August 2014, ordered to pay $28.4 million in restitution to seven victims and forfeit an additional $20 million as punitive damages.

The power of suggestion is particularly strong when it comes to wine tasting.”

Wine fraud the old-fashioned way: John Fox and Premier Cru

Oakland, California, wine merchant John Fox of the wine retailer, Premier Cru, was contracting with U.S. investors to buy European wine and sell it to customers prior to it arriving in the country. Fox promised delivery within two years for the wine shipments.

Premier Cru then offered the “inventoried” wines for sale below market price on its website. From 2010 to 2015, customers paid nearly $20 million for the ghost wines. Fox then had to divert incoming funds to purchase wine for previous customers who hadn’t yet received their shipments. He often purchased these wines from competing stores at higher prices for bottles that he’d originally sold customers.

Fox extended the fraud even further when he used company business accounts and credit cards to pay for home mortgages, personal credit card bills, a daughter’s college tuition and country club memberships plus leased Corvettes, Ferraris, a Maserati and several Mercedes-Benz vehicles, according to the Wine Spectator article. He also admitted to spending $900,000 on women he met online.

Ponzi schemes have one end result

As with all such Ponzi schemes, the end was a foregone conclusion. Filing bankruptcy led to lawsuits in state and federal courts. Fox estimates that 4,500 customers paid more than $45 million for pre-arrival wines they never received.

In August 2016, Fox pleaded guilty to one count of wire fraud in connection with the huge Ponzi scheme. A plea agreement reduced his sentence from 20 years to six years and six months. He also agreed to restitution of at least $45 million to customers and creditors.

The harvest is ripe for wine counterfeiters

Wine tasting, after all, is a highly subjective exercise and opinions about taste are prone to psychological suggestion. Except for the pinnacle of wine connoisseurs, taste has as much influence with what we think of a bottle as what we know. If we think a wine is expensive, odds are it will taste that way, too.

And wine counterfeiters know that.

A University of Bordeaux study tested the theory that wine drinkers bring their own presuppositions and interpretations to wine tasting. The study showed that participants mistakenly took white wine for red (red food coloring was added to white wine samples) and were influenced in their selections by impressions from others who detected notes of “jam” and “crushed fruit” in the test samples. (See
Does all wine taste the same? by Jonah Lehrer, June 13, 2012, The New Yorker.). The power of suggestion is particularly strong when it comes to wine tasting.

Persuaders use the tool of psychology to influence human behavior every day in all walks of life. As Nick Kolenda wrote in “Methods of Persuasion” (Kolenda Entertainment, LLC, 2013), the tools for persuasion can apply to both ethical and unethical end goals: Persuaders first mold perceptions and then draw out congruent attitudes. They next apply social pressure so the message becomes comfortable. Persuaders then optimize the messages, accelerate the momentum to close and finally sustain compliance.

In his later years, Thomas Jefferson stopped ordering wines directly from French chateaus because his preferences changed to inexpensive table wines. But the frenzy over the Jefferson bottles wasn’t about the contents; the wine could’ve turned to vinegar after 200 years. The attraction was in the perceived rarity and provenance of the bottles themselves. The blind pursuit of and desire to possess rare objects is fertile ground for those ready to take advantage of such an obsession through the unethical use of persuasion psychology.

Unfortunately, it’s likely the most expensive and “rare” counterfeit wines in the cellars of collectors are still there: shelved, unopened and preserved as conversation pieces or awaiting the next unsophisticated investor.

Donn LeVie Jr., besides being a wine and cigar guy, is a frequent contributor to the “Career Connection” column in Fraud Magazine and a career strategist at ACFE annual conferences. Follow him on Twitter: @donnlevie. His website is donnleviejrstrategies.com. His email address is: donnlevie@austin.rr.com.

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